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By Vishwas.R.Bhat MBA 2nd year MINDS
• Dabhol Power Company (DPC) was promoted in March 1993 as a 100 per cent foreign owned private unlimited liability company incorporated in India by Enron Corp., USA (Enron), Bechtel Enterprises Inc., USA (Bechtel) and General Electric Co., USA, (GE). • In Phase I DPC will set up a combined cycle power plant with an installed capacity of 695 MW at Dabhol, Guhagar taluka, Ratnagiri district, Maharashtra. • The power generated by the plant will be sold to the Maharashtra State Electricity Board (MSEB). The cost of the project is estimated at Rs. 3029 crore (US$ 946.55 million).
• To study the detailed problems of the project • To formulate the controveries • To find out the reasons behind the failures of the project • The different players behind the failures
Review of literature
• The Dabhol power plant project in India in the 1990’s is a case in point in the power sector. • The election of a new government that was not supportive of the project led to renegotiation of tariff rates that reduced the profitability of the private firm . • Private sector consortium had signed a memorandum of understanding with the local government. However when a new government was reelected, the conditions of the preexisting agreement were unilaterally revised, resulting in the private sector consortium –the Dabhol Power Corporation (DPC) stopping the project.
• • • • • • Government of India Government of Maharashtra Maharashtra State Electricity Board (MSEB) Enron Corp. (Enron International) General Electric Co. (GE) Bechtel Enterprises
Dabhol Power Company
Revised shareholding pattern
MSEB Enron International 10% 30% GE Bechtel
• Dabhol, Guhagar taluka, Ratnagiri district, Maharashtra. • Around 300 km from Mumbai,
– 45 Km from Chiplun, – along NH 17
• Total area: 1, 700 acres
Background on Enron’s Dabhol Power Project
• Enron is a majority owner of Dabhol, a massive combinedcycle power plant on the western coast of India's Maharashtra state. • The Dabhol power plant was initiated in 1992 and took nine years to commence operation. • The project is 2,184 megawatts, which Enron says is the largest gas-fired power plant in the world. • The plant closed in June 2001, due to a payment and contract dispute • between the Maharashtra state government and the plant owners. • Enron says it incurred over $1 billion in costs for the plant.
Timeline of the project
1992 GoM, Enron, GE, Bechtel sign MoU 1993 PPA signed 1995 Construction of Phase 1 begins, change of govt. in Mah, project scrapped 1996 Renegotiation, construction of Phase 1 resumes 1999 Phase 1 becomes operational 2000 MSEB begins to default 2001 Enron files for bankruptcy, DPC shuts down
Details of the power plant
• Phase 1
– – – – Capacity: 740 MW, Cost: $ 1.078 billion Fuel: Naphtha Operations began: 1999
• Phase 2
– – – – Capacity: 1, 275 MW Cost: $ 3.5 billion Fuel: LNG Construction suspended
-------------------------------------------------------------------------• Total capacity: 2, 015 MW • Originally estimated cost of plant: $ 2.8 billion • Capital cost calculated by DPC: Rs. 4.5 crore/MW (’96)
• Power Purchase Agreement for 20 years • Implemented on BOO basis • MSEB guaranteed to buy 90% of power produced • MSEB to receive 30% profits of DPC annually • MSEB to bear any increase in fuel price • MSEB to guarantee a min. fuel purchase • MSEB to pay DPC $ 220 million per year
Reasons for non performance of ENRON
• By early 2002, Enron was variously termed “radioactive,” “contaminated,” and “obstructionist”. • The Congress government in Maharashtra was defeated in the state polls in March 1995 and a new government of the Bharatiya Janata Party (BJP) and Shiv Sena came to power. • A committee lead by the Deputy-Chief Minister recommended scrapping of the project. Finally, the government scrapped the project on August 03, 1995.
The other reasons that had an effect on the closure
• Failure of the GOIWhen Enron, Bechtel, and GE secured the
impressive guaranties and economic concessions from the GOI, it’s hard to imagine that they foresaw the upcoming failure of the GOI to honor
its financial and contractual obligations, much less the GOI’s course of
conduct that was deemed expropriatory by an American arbitration panel. • In addition to failing to honor its counter-guaranty, the GOI also, through its judiciary, improperly thwarted international arbitration panels from proceeding.
• The GOI refused to commit the resources to solve the problems raised
through the project’s failure.
• Failure of the GOM
• The government of Maharashtra was the sole purchaser of power under the PPA, and was also, ultimately, a 15 per cent equity holder in the project. • Through its subsidiary, MSEB, the GOM was a prime mover in every aspect of the deal’s completion, and was the chief beneficiary of the PPA due to the state’s energy starvation. • This unforeseen contractual breach was followed by the GOM’s participation in important arbitrations and lawsuits, sometimes willingly, sometimes not. • The GOM also utterly failed to participate or assist the long workout efforts. Their absence was as confounding as it was difficult to work around.
• Lack of competitive bidding • MoU signed within 20 days • NWG on Power found that MSEB would incur losses amounting to Rs. 2000 crore • One-sided MoU in favour of DPC (World Bank) • No EIA was carried out
• World Bank turned down financing when sought by Central govt.
– It felt that the project was "not economically viable". – It also advised the project did not satisfy the test of least cost power and – it was too large for the power demands of Maharashtra.
• Power tariffs higher than those from other independent power projects in the country • MSEB to buy 90% of power produced and from no other plant • Counter-guarantees provided by State govt. which waived sovereign immunity. Similar counter-guarantee signed by Central govt. • Agreement was treated as confidential
• Electricity charges/kWh:
– Rs. 3 (Phase I, ‘99) – Rs. 7.80 (Phase I, 2000) – Rs. 2.54 (as claimed for Phase II, ‘99)
• In June 2000, the DPC reported profits of $42 million during the first year of its operations • MSEB owed DPC almost $ 110 in Jan 2001
• Land resettlement, compensation to affected fishermen, pollution control measures • Enron paid $20 million as "educational gifts“ • Project's promoters had not obtained the CEA's statutory clearance as required under the Electricity Supply Act
• Based on this analysis, the appropriate return to equity holders should not be much greater than the cost of foreign debt given the PP A and the counter guarantee by the Government of India • Payments by MSEB as per the PP A has been guaranteed by the Government of Maharashtra and counter guaranteed by the Government of India. • The cost of foreign debt assumed in the Enron project is 1011 per cent. This is not the risk-free rate but a rate which takes into account default risk. • Government of Maharashtra and Government of India and possibly by other contract-ing parties, the premium for equity appears excessive.
• This conclusion is confirmed by a recent McKinsey study by Chia and Mallick (1996). According to this study: "Independent Power Producers (lPPs) have been asking developing countries to pay higher prices than developed countries
• Mickael Chia and Rob Mallick, "Why Power Projects Get Stalled", The McKinsey Quarterly, 1996, No.2. • FACT SHEET=Background on Enron’s Dabhol Power Project. • The Dabhol Power Project Settlement • What Happened? and How? Kenneth
Hansen, Robert C. O’Sullivan and W. Geoffrey Anderson